Intangible Capital Assets ACCOUNTING FOR INTANGIBLE ASSETS In

Intangible Capital Assets

ACCOUNTING FOR INTANGIBLE ASSETS • In general, accounting for intangible assets parallels the accounting for capital assets. • Intangible assets are: 1. recorded at cost; 2. written off over useful life in a rational and systematic manner; 3. at disposal, net book value is eliminated and gain or loss, if any, is

AMORTIZATION • Amortizable intangible assets – Have defined lives – Allocation of the cost to expense over the shorter of • Useful (economic) life • Legal life • Straight-line method of amortization used

TYPES OF INTANGIBLE ASSETS • • • Patents Copyrights Trademarks and Trade Names Franchises and Licenses Goodwill Research and Development Costs

PATENTS • Exclusive right to manufacture, sell or control granted for 20 years • Legal costs of protecting a patent in an infringement suit are added to the Patent account and amortized over the remaining life of the patent

COPYRIGHTS • Copyrights are granted by the federal government giving the owner the exclusive right to reproduce and sell artistic or published work • Copyrights extend for the life of the creator plus 50 years

TRADE MARKS/NAMES • Word, phrase, jingle or symbol that distinguishes or identifies a particular enterprise or product • If indefinite life, do not amortize. Test for impairment

FRANCHISES • Contractual agreement under which the franchiser grants the franchisee the right – To sell certain products – To render specific services or to use certain trademarks or trade names, usually within a designated geographic area

LICENSES • Operating rights permit the enterprise to use public property in performing its service (i. e. the use of airwaves for radio or TV broadcasting)

GOODWILL • Goodwill represents favourable attributes that relate to a business enterprise • Record only in an exchange transaction that involves the purchase of an entire business • Goodwill equals the excess of cost over the fair market value of the net assets (assets less liabilities) acquired • Goodwill is not written off as it has an unlimited useful life. It must be tested regularly for impairment.

Goodwill Example • Johnson Company buys out its closest competitor, Mercury Limited, Mercury is known for its excellent products, stellar management, and top notch customer service. • Purchase Price: $3, 400, 000 • Value of Mercury Limited’s Net-Assets: $2, 800, 000 DR Dec 31 Assets of Mercury Limited Goodwill Cash CR 2, 800, 000 600, 000 3, 400, 000

RESEARCH AND DEVELOPMENT COSTS • Research costs–record as an expense when incurred • Development costs–capitalize if associated with an identifiable, feasible product. Otherwise, expense

FINANCIAL STATEMENT PRESENTATION • • • In the balance sheet, property, plant and equipment, natural resources, and intangible assets are often combined under the heading Capital Assets. There should be disclosure of the balances in the major classes of assets and accumulated amortization of major classes of assets or of assets in total. The amortization methods used should be described and the amount of amortization expense for the period disclosed.

Capital Assets Ratios • The ratio that shows how efficiently a company uses its assets to generate sales is the asset turnover ratio. Net Sales Average Total Assets = Assets Turnover • The ratio that shows the profitability of assets used in the earnings process is the return on assets. Net Income Average Total Assets = Return on Assets